When Tech Becomes a Barrier to Entry

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on Jul 11, 2019 9:00:00 AM
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Technology has the capability of growing a small restaurant into a national chain. However, it also has the ability to collapse the hyper-competitive nature of the industry and solidify a barrier to entry that most entrepreneurs won’t be able to hurdle financially.

As if the industry needs any more challenges, technology may soon turn the restaurant industry on its head.  Small businesses will have to choose between offering great food and service and becoming a small-to-medium tech startup.  A marketplace like this ultimately favors the big brands like McDonald’s, Yum Foods, and Starbucks because they already have the capital to rapidly expand their technological prowess without needing outside funding (though some may utilize it anyway). 

Mom-and-pop shops, on the other hand, will need that outside funding to keep up with the changing industry.  Unfortunately, that funding may be diminished after the big dogs eat.  Or, it may not be there at all.

According to Restaurant Hospitality, the majority of the 20 noteworthy restaurant investments by venture capital firms in 2018 were propelled at least in part by some proprietary technology the restaurants offered.  For example, Eatsa—a robot-run, fast-casual eatery in San Francisco, California—received a sizeable investment from Valor Equity Partners in part because the restaurant’s integrated kitchen system has minimized the human errors that typically accompany a traditional kitchen.  Customers are greeted, order, and are served food by robot and have zero interactions with staff, allowing employees to stay focused on one task rather than scatter-braining around trying to complete an impossibly long checklist all at once.  This allows kitchen staffs to make great food without the stress of handling customer complaints.

Another San Fran based concept, Bamboo Asia, offers investors an automated inventory management system and a cloud kitchen software that has demonstrably improved the restaurant’s back-of-house efficiency and profitability.  In fact, the company’s owner, Sebastiaan van de Rijt, admitted to Restaurant Hospitality that his goal is to make the company a tech innovator within the industry.

So what makes these concepts so much more attractive to venture capital firms than a traditional restaurant?  After all, it seems as though they’re playing a completely different game, right?  Wrong.  Tech-heavy concepts are offering the same things as traditional restaurants: great food and service.  The key difference between the two groups is that the tech-heavy restaurants ultimately become more efficient, and therefore profitable, than traditional setups.  Traditional restaurants rely on people to manage their processes.  Unfortunately, that means they are allotting a part of their working capital to cover mistakes, which can be costly.  On the other side, tech-heavy restaurants utilize algorithms to streamline their processes, which are much more predictable than human behavior will ever be.

These trends leave smaller restaurants in a tough position when it comes to reinventing their business for the future.  In most cases, technology requires a specialized talent pool to moderate its uses, and just like the industry as a whole, the demand for this talent is outstripping the supply. This means that those who are capable of helping small businesses implement technological breakthroughs are already working for the conglomerates who can offer them a high salary. This is where technology can hamper small business growth.

Technology is the driving force of reinvention within the restaurant industry, and if that engine is shut off for a large swath of businesses, then the industry itself will start to homogenize in a way that could deter future entrepreneurship.  Big fish eat little fish.  That’s true in every industry.  But once the ocean is full of only big fish, what happens next?

In order to not become fish food, restaurant owners need to be prudent in realizing that they are powerless to tear down the technological barrier that is being built in the industry.  Tech-heavy restaurants are making too much money, and that is putting more confidence in their business model.  Instead, restaurant owners should analyze how they implement technology in their business. For starters, be sure to incorporate technology that is completely necessary like inventory software that connects to the POS.  Second, be sure to control every aspect of the business.  It’s important to remember why you got into this industry.  Surely, you didn’t do it because you want to sell technology to your customers.  Make sure your technology works in a way that makes your customers want to return and eat your food.  That’s the most important part.

Topics: Technology, Capital, Restaurant Experience

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